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Bullions in the UK are trading at a premium to the wider market – the fact is that there is a substantial outflow of Gold from the UK towards the US. It is said that physical gold, with spot deliveries, trades at a premium of more than $5 an ounce, which is about 0.21% below the market price. Historically, the range of discounts/premiums ranges +/- a few cents per ounce and is driven by central bank policies.

The divergence, while small, is extremely unusual, with gold at the BOE usually trading in lockstep with prices in the rest of the London market, where bullion changes hands through L2L transactions between the major operators such as JPMC, HSBC, UBS, and others.

The disconnect comes as traders worldwide rush to get gold to the US ahead of the potential imposition of tariffs and to capture premium prices. The new Administration under President Donald Trump hasn’t targeted precious metals specifically, but dealers are worried they could be included in blanket tariffs that he’s threatened.

With traders racing against the clock, thus the Bank of England is struggling to keep up with deliveries, and growing queues are making the gold in its vault more attractive than bullion held in more accessible commercial vaults around London.

The BOE holds more than 400,000 gold bars at 12.4 kg (400 ounces) nominal weight or some 5’000MT, worth over $450 billion at current prices. The BOE holds them largely on behalf of other central banks, but also for a few key gold dealers. According to LBMA data, it is estimated that there is about 8’000 MT of gold stored in London, with much of that owned by exchange-traded funds and other investors who may not wish to sell.

Another interesting observation is the fact that prices for gold on New York’s Comex surged over international benchmarks in recent months. Those spreads have since come down, but freely available gold remains in tight supply in London as traders who sold futures at the high prices seek to secure metal to deliver on their commitments.

The tightness can be seen in the one-month lending rate which jumped by about 4.7%; historically the rate of borrowing gold hover just above the spot rate. The rate reflects the return that holders of bullion in London’s vaults can get by loaning their metal out on a short-term basis, aka some dealers got caught on the wrong side of the trade.

Some central banks look to earn a return by lending out their gold when rates do rise. Since they predominantly hold their gold at the BOE, that means the bullion in its vault is often a key source of liquidity in moments of market tightness.

Another reason for the present price distortion is the fact that gold bars traded through LBMA are not compatible with trading standards at the Comex exchange. Bullion traded in London are bars of 400-ounces whereas Commes trades bullion bars of 100-ounces. When trades ship bullion from London to New York, bullion is first transferred to Switzerland and refined. The premium for 100-ounces grew as large as $50.- an ounce, which makes the round trip possible.

Finally, we note that while there are some advantages of holding bullion with the BOE (lower storage cost and lending opportunities), the disadvantage is that you can access your bullion under ever circumstance. That is why some operators prefer a commercial vault, which comes at a higher expense, but offer limited lending facility.